ACCA · Question 32 · Decision-making Techniques

Section C

MetroGrid Power is a public utility transitioning to renewable energy. They must choose one of three infrastructure upgrade options. The Net Present Value (NPV) of each option depends on whether the government passes a 'High Subsidy' or 'Low Subsidy' green energy bill.

Probabilities: High Subsidy = 0.6, Low Subsidy = 0.4.

Payoff Table (NPV in $ millions):
Option A (Solar Focus): High Subsidy = $50m, Low Subsidy = $10m
Option B (Wind Focus): High Subsidy = $40m, Low Subsidy = $25m
Option C (Mixed Grid): High Subsidy = $35m, Low Subsidy = $30m

MetroGrid currently uses an annual budgeting process but is finding it too rigid given the rapid changes in renewable technology and government policy. The CFO has proposed switching to a Rolling Budget.

Required:
(a) Calculate the Expected Value (EV) for each option and recommend which option MetroGrid should choose based strictly on EV. (6 marks)
(b) Discuss the limitations of using Expected Values for this specific decision. (6 marks)
(c) Evaluate the CFO's proposal to switch from annual budgets to rolling budgets, highlighting the behavioral and operational impacts on MetroGrid's managers. (8 marks)